Being a collection of thoughts, observations, comments, opinions and views on investing--especially for the long term.
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Friday, May 27, 2005

The Do-It-Yourself Mindset

What do E*Trade and Home Depot have in common? Between online brokerage services and big-box hardware supplies, these two companies couldn't operate in more dissimilar areas. However, they do have a common thread: Both businesses thrive on do-it-yourselfers.

As examples of the tremendous cost savings from doing things yourself, I cite recent experiences from my home improvement efforts. The day after we moved into our house a few weeks back, we had our air ducts cleaned and, during an inspection of the furnace by the same service professional, learned that our heat exchangers were cracked. As a result, our furnace was "red-tagged" (deemed inoperable based on safefy concerns), since cracked heat exchangers can lead to excessive levels of lethal carbon monoxide gas leaking into the air duct system. Luckily the heat exchangers carry a 20-year warranty. However, the cost of labor for a licensed specialist to spend three to four hours reaching back into the guts of the furnace (behind the electrical control panels, burners, gas intake, etc.) to pull out the heat exchangers and replace them is $500 to $600.

In an earlier post, I mentioned the fir tree in our front yard. It turns out that, after hearing from a tree-hugging neighbor, we decided to trim the tree rather than cut it down. As in stock investing, where for every stock there are numerous opinions on whether to buy or sell, so it goes with trees. Most of the professionals we have spoken to (particularly tree service companies trying to line up their next tree-cutting job) say that we should remove the tree. However, there are an arborist or two in our area who opine that "the tree can stay, unless we are very concerned about the proximity of the roots to the foundation and water and gas lines" (like economists and politicians, these arborists qualify their statements and refuse to offer a usable guessimate as to how many years we have before we experience actual damage from root growth). The arborists, however, like the tree cutters, are happy to give us firm estimates on tree trimming. Cost: $500 for trimming (mainly "defluffing" the limbs, as they call it), which is the same as the price we got from the tree cutters for removal of the tree.

In short, specialist labor is expensive. So, being of a do-it-yourselfer mindset, I spent a day or two of my own time on each job: Crash courses on furnace repair and tree trimming, trips to our local heating and air conditioning shop and Home Depot for supplies ($5 for high temperature caulking for the furnace and $30 for a tree pruner pole 12 feet long), plus a day with my head in the furnace and another day perched on the edge of our roof with a 12-foot pole in my hands.

As a do-it-yourselfer, I spent pocket money (just $35 total) and a few days of my time on jobs that I could have turned the pros loose on for $1000. Similarly, in my investing I have the option of hiring fund managers (i.e., investing in mutual funds and/or hedge funds) and paying 1% to 2% or more in management fees each year, which can easily run into many thousands of dollars. But, rather than hire the so-called "experts," I choose to manage my investment portfolio on my own, using a discount online broker like E*Trade.

I think that a type of 80-20 rule applies to professional services. 80% of the so-called "experts" do a mediocre job and 20% are exceptional. It is generally worthwhile to pay fees to the 20% high-quality performers, but identifying them is often a spotty, hit-and-miss process full of risks and uncertainties. So, instead of relying on the experts, I spend highly focussed periods of my own time educating myself and learning the basics to enable me to reach the 80% level very quickly. In so doing, I usually am able to achieve what I consider to be the high performance level (top 20%) on certain narrowly defined jobs (e.g., replacing heat exchangers). Further, as a do-it-yourselfer, I am pleased that I am able to avoid paying dear for services of the mediocre (bottom 80%).

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